Splitting Pensions in Divorce

When spouses separate and then divorce, there will be a need to split up pensions if one party’s pension is significantly better than the other. Usually, that is the case since most couples do not follow the general plan of splitting pensions 50/50.

Admittedly, there is very little that can be done when you are talking about Defined Benefit (DB) schemes, because people need to work to the rules of their schemes; there is no alternative. Defined Contribution (DC) schemes though are very different.

What we try and do for all of our clients (where possible) is ensure their pension planning is as even as possible. This kind of planning maximises the use of personal tax allowances in retirement, and it can also keep any tax liability at 20% instead of somebody wandering into 40%.

Splitting DB schemes can be a bit of a nightmare, as you need to get a definitive valuation as at the date of separation. This is not always easy, and it may be necessary to involve an actuary who understands the scheme rules and also how any valuation could be worked out. Valuers will need to use some assumptions along the way.

Splitting DC schemes though is much easier – all you need to do is get a valuation of the assets concerned as at the appropriate date, and that’s it.

It’s down to the solicitors acting on behalf of the spouses to decide who gets what. They can only work with correct figures however, and that’s where IFAs can come in, with their understanding of scheme rules and assumptions, plus compliance aspects. Accountants dealing with such clients will then need to take such splits into account when planning out future strategies for their clients, but IFAs can also help in this respect.

When we do pension planning for clients, we much prefer to use what is called our Pensions Guesstimate, which lets an individual see projected future pension income, thus allowing them to plan accordingly.

Notes:

The State pension is £8,110 at age 65, and what we are showing here is annual accruals up to 65.

If someone has a DWP forecast, we would put that forecast into the Guesstimate too.

Maximum Tax-Free Cash is taken out after separation, as client aged over 55.

The average growth figures we work to are 3% for low-risk investors, 5% for middle-risk investors and 7% for high-risk investors.

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